Blackfinch flies on IHT
6 mins read
4 mins read
The process of using IHT Portfolio services differs depending on an individual’s profile. Here, Blackfinch explores how an IHT investment portfolio is able to help investors mitigate liabilities
Mitigating IHT liabilities: How does it work in reality?
EIS fees: Vala’s simple and transparent approach takes off
5 mins read
Vala Capital’s Jasper Smith and Paddy Willis have brought together a unique set of entrepreneurial experiences in order to provide new businesses – and investors - with the support they require to succeed
Could entrepreneurialism be the winning mentality for EIS schemes?
7 mins read
Beyond the headlines, are figures that suggest that VCT fund raising is at an all-time high masking challenges for the sector as a whole?
Green shoots against a prudent VCT landscape
With strong performance and lower fees, the growth of EIS strategies over the past few years is placing the sector firmly on adviser radars again
Taking a punt on UK innovation
© 2019 Incisive Business Media (IP) Ltd
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ver since their introduction over 20 years ago, the model of venture capital has transformed investing in early-stage companies, and also challenged negative sentiment towards high-growth business opportunities.
Despite fundraising levels reaching record amounts in recent years, the sector has had to deal with its fair share of changes as well. From the government announcing new VCT qualifying rules which means funds must be investing in the equity of early stage, emerging businesses; to a new ‘HMRC approved’ fund structure for EIS vehicles that could come into force as soon as 2020. It remains to be seen how these changes will continue to impact the sector and future fundraising levels. For many providers, it is business as usual – and even the looming Brexit clouds have not dented the number of strong and innovative investment companies that continue to cross manager paths. In particular, the entrepreneurial nature of those involved in the EIS sector themselves is proving to be a vital factor in its future prospects - perhaps recognising a need that investable companies need to be entrepreneurial and technology-driven in order to ensure they are able to compete on a global scale. As such, it is no surprise that across the vast range of VCT, EIS and IHT portfolios, there is evidence of newer funds emerging with unique propositions.
How managers across the VCT, EIS and IHT space are honing their skills to find and support the most innovative growth companies across the UK
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Blackfinch Chief Executive, Richard Cook, explains how the group’s IHT Portfolios service model not only offers core transparency but also provides several key points of difference in what has grown to become a very crowded sector
The lure of tax efficient entrepreneurialism
Vala Capital’s announcement that its newly launched EIS fund will operate a unique fee structure is shaking up conversations regarding EIS fees as a whole
While the number of funds raising money last year was on the rise, the number of VCTs managing money has been on a steady decline
The rule changes have narrowed the target market, which will impact the ability of some VCTs to deploy capital
“As lead manager of Unicorn AIM VCT, I believe it is prudent to restrict the size of new offers, such that the underlying net assets of Unicorn AIM VCT remain below £250m,” says Hutchinson. “There are a number of sensible, practical and technical reasons for this self-imposed cap. Our focus has always been to try and deliver attractive and consistent returns for our shareholders over the long term, through adopting a relatively low risk approach when it comes to constructing the investment portfolio. Restricting the size of new offers helps us to achieve this objective.”
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oing by the data alone, the VCT sector is in rude health. According to the statistics from HMRC, in the 2017/18 tax year a total of £745m was raised from investors across all the funds in the sector.
This is the second-highest total since VCTs were first launched in 1995 and represents a 30% increase on the figure for the year previous of £570m. Moreover, the number of investors taking advantage of VCT relief rose by 13% to 15,120. However, the trends beyond these headline figures aren’t quite so positive. First, the headline figure for the amounts raised comes with some caveats. In particular, HMRC identified something of a rush to get money invested ahead of what turned out to be unfounded fears of negative comments for the VCT sector from last spring’s Patient Capital Review. And while the number of funds raising money last year was on the rise – from 38 to 43 – the total number of VCT funds fell from 75 to 70. Indeed, since a peak in 2007/08 of 131, the number of VCTs managing money has been on a steady decline for some time. Chris Hutchinson, director and senior fund manager at Unicorn Asset Management which itself runs a £176m VCT, says that it appears that circa £535m is being sought in new money in the 2018/19 tax year, split between 18 different providers. “It is likely that the lower amount being sought this year is due to fewer providers choosing to participate, which may be because they are no longer eligible to raise new capital under new VCT qualifying rules, and/or because they are at, or close to, optimum size already in terms of net assets,” he comments. Certainly, the constraints in terms of capacity and the ability to actually deploy capital are just some of the reasons why the amount being raised this year is likely to be lower than last year.
Jack Rose, head of tax-efficient products at LightTower Partners, agrees that the effects of the recent changes are yet to feed through to the products: “This is because the majority of VCT offers are top-ups to existing portfolios and the majority of those existing portfolios are in companies that pre-date the rule changes. “As these old investee companies are sold off over time, the portfolios will increase their weighting to the new style of deals and away from the old MBO deals. How this plays out will be difficult to say but one possible impact will be in the dividend profile of some VCTs. I would expect dividends to be less consistent as they will increasingly be reliant on successful realisations. ”He also notes that while there are less VCT managers in total, there is evidence of newer funds emerging with interesting propositions. “We have seen a number of new entrants to the market this year (for example Seneca and Draper) as well as a few managers returning who didn’t raise last year like TriplePoint. “It’s certainly true that a couple of the bigger managers either didn’t raise or have very limited offers (but) I think it’s a good thing; it shows a prudent and sensible approach to raising money.”
Added to this, he points out that raising large amounts of new capital in any single tax year runs a risk of putting the fund manager under pressure to make investments purely to meet new and technically complicated rules to ensure retention of VCT status, “thereby preventing the manager from exclusively focusing on the respective merits of individual VCT qualifying investments.” Similar concerns are raised by John Davies, investment director at Seneca Partners. “We know that we can transact 20 great deals a year, so we base our fundraising on that level of investment,” he says. “Any more and we would be in danger of non-deployment, which is an issue that other VCTs could be facing in the next 12 months.” The government’s emphasis on VCTs has also subtly changed in recent years with the ending of asset-backed investment and as with EIS, the emphasis being very much more focused on growth capital opportunities. “The rule changes have narrowed the target market, which will impact the ability of some VCTs to deploy capital,” says Davies. “The majority of VCTs are relatively new to the growth capital space and have been transitioning their teams and investment strategies to fit within the new rules regime. This isn’t an overnight fix and will take time to adopt, which could ultimately result in delayed deployment.”
The Big VCT Question
For some time now the ‘seven year rule’ has had an influence on the type of transactions being undertaken and we are still in a period of adjustment for both providers and investors alike. Generally, the historic leveraged MBO type deals have come to an end and the new world is settling into the transition of investing in smaller, younger companies. The result of all this age profiling inevitably points towards an extension of the investment term as these businesses require longer to graduate up their growth curves. Hence the term ‘patient capital’. At an investor level, the composition of VCT investments will be changing, more so as time goes on. For providers the scenario is rather more far reaching, especially for those who are now required to pivot their investment strategies in order to comply.
How have rule changes effected the way VCTs invest capital and the products within them – specifically around dividends and income?
John Davies Investment Director at Seneca Partners
Chris Hutchinson Director & Senior Fund Manager at Unicorn Asset Management
Not only does this require access to different deal types but also because investee companies are less mature, investment cheque sizes are inherently smaller creating the need for more deals in order to satisfy the same level of deployment. If investment quality is to be maintained and the same stringent due diligence process adhered to, then either amounts available as ‘open offers’ will likely reduce or a hefty increase in investment capability and headcount will be needed. In upshot, capacity trends may be reducing. For the time being providers will probably still be able to draw upon their reserves but undeniably it will be the manager’s agility in the current climate to select the best investees which governs the sustainability of income for investors.
The impact on those who choose to invest in VCTs remains to be seen. VCT shareholders should be in no doubt that new capital will be invested in less mature, riskier businesses and, as a consequence, the investment outcome is likely to become more binary. The failure rate among such investments will probably increase, while those early stage investments that do succeed are likely to become highly rewarding for shareholders over time. The result of the rule changes is therefore a welcome return to a simpler and purer form of venture capital investing. Even if this does mean that the stream of tax free dividend income produced by the average VCT becomes somewhat more irregular and unpredictable in the future.
Recent rule changes are designed to ensure new capital raised by VCTs is invested in the equity of early stage, emerging businesses enabling them to develop and grow strongly and rapidly. As this patient capital approach matures, multiple benefits should arise in the form of increased employment opportunities, greater tax take for government and the creation of a thriving, dynamic and truly entrepreneurial foundation for growth in the UK economy. The impact of these rules on qualifying companies is already being seen. Asset backed and/or acquisitive businesses are no longer eligible to receive state aided funding, while early stage technology, biotech and media/leisure focussed businesses are successfully attracting new capital and growing rapidly as a result.
John Davies, Seneca Partners
For advisers, investors and providers alike there has been a paradigm shift in the EIS sector
The 10 bagger, as it is sometimes called, is a theme picked up on by Rajeev Saxena, who is the founder and managing director at a new market entrant, Velocity Capital Advisors which launched three-and-a-half-years ago. “Our aim is high capital appreciation,” he says. “By that, we mean 10 times the investment return. Our investment philosophy is to look for innovation. But that has to resonate with the customers.” He suggests that Velocity are not fund managers in the traditional sense, but rather the company views itself very much as co-investors, with all the founders having previously been entrepreneurs in the creative and marketing spheres. “That’s why we think we are different; we haven’t just managed funds, we have built up businesses,” he adds. “We think we are unique in EIS because we ourselves invest in these businesses. We are aligned with the management and our investors. ”The entrepreneurial nature of those involved in the EIS sector themselves is in itself a vital factor in its future prospects. As Rose at LightTower explains: “The brilliant thing about both the VCT and EIS schemes in the UK is that they are as dynamic and nimble as the businesses they are in place to support.” “The future shape of the sector will largely be determined by the government and legislation, as has been the case in the past,” he adds. “This makes it difficult to predict how things will pan out in the longer term. But for now, the return to a focus on providing growth capital to support SMEs is in line with the original foundations of the sector.” As Mattick says, this also happens to be key to the economy of the country, particularly given the political backdrop. “We need to continue to be entrepreneurial and technology-driven as that is the only way to compete globally.” Both Mattick and Saxena talk about having strong pipelines of companies coming through that they are considering investing in. “We are seeing lots of opportunities,” says Mattick. “For some advisers, EIS is simply not relevant. But for those where it is, we can offer strong performance with relatively low fees.”
schemes – notably those involved in solar – have helped to more clearly define the sector. That definition is as a risk product and takes us back to the original mission statement for EIS over 25 years ago. EIS was always meant to be about growth capital, rewarding investors in early-stage companies with tax benefits that compensated for the greater degree of risk involved. “For advisers, investors and providers alike there has been a paradigm shift in the sector,” says Jack Rose, head of tax-efficient products at LightTower Partners. He points out that for many years the sector was dominated by products that had significant assets or contracts in place that were designed to limit the downside for investors over the shortest investment time period as possible. “These products usually had limited upside, but that wasn’t really the point of them,” says Rose. “They were invested in for predominantly financial planning reasons, especially around Capital Gains Tax (CGT) deferral and estate planning.” The landscape is very different now, however. “We are left with what the essence of EIS should be – risk capital and supporting SMEs,” says Rose. “And the timeframe and risk profile is substantially different to the days of the past. This has meant a period of substantial change for advisers on how they position it with clients and for whom it is relevant and appropriate for. This period of adjustment is far from over and it’s likely to continue for a few more years.” One of the more prominent of the growth capital investors is Mercia Fund Managers, an investment company with a long track record in all forms of venture capital and across all products currently has £500m of funds under management. Paul Mattick heads up sale and investor relations for the EIS part of the business, Mercia Growth Funds. He points out that Mercia works as an early-stage investor across a lot of sectors, but with a particular focus on tech-led enterprises. “With EIS we tend to raise between £10,000 to £150,000 investments,” he says. “Now out of the 15 companies in any one fund, on average we would expect five to fail. It is high-risk. But the high-performing companies we expect to do very well – up to five times our original investment. And we’re looking for 10 times returns. We have had that (type of success) within the broader group.”
he figures for EIS investment in the tax year to April 2018 that will be released in the coming months by HMRC will tell a story of a sector in transition. The moves on the part of the government in recent years to bring to an end capital preservation EIS
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Jack Rose
The EIS landscape has dramatically changed for investors, do you think this change has been misrepresented or overdone?
EIS reduces the risk by offering clear tax incentives to investors. Investing in these companies through EIS enables investors to claim 30% tax relief on investments up to £2m. Plus, they can gain even more by investing through those portfolio funds that also offer carryback, enabling investments to be offset against tax in the previous year. What’s more, any loss an investor makes through EIS can also be offset against tax.
Rather than the Government’s changes to EIS being misrepresented or overdone, I think they make the scheme more transparent, focused and align it more closely with what it was introduced for, namely to boost jobs and the economy by encouraging investment into innovative high-growth technology startups. Previously some investors were ‘playing’ EIS by using it for lower risk investments for which the scheme was never intended, and still benefiting from the tax breaks. High-growth tech startups are traditionally viewed by investors as high-risk, but they also have huge potential in terms of the returns they can deliver – both to investors and the UK economy.
Rajeev Saxena Managing Director of Velocity Capital Advisors
Despite having been EIS qualifying, partly due to a lack of EIS capital at the time, it was actually one of Mercia’s non-EIS seed funds which invested £900,000 into Blue Prism. The company’s growth as a private company and then on AIM from 2016 has been well documented as it reached unicorn status in February 2018. The investment has made an impressive return for the fund investors. Investing in the spirit of EIS is synonymous with taking a risk, as defined by HMRC’s risk to capital condition. These different requirements for EIS qualification require a different investment strategy, with diversification and selection of a manager with a proven track record being key to deliver optimal returns.
Historically, over half of all EIS investments were made into capital preservation strategies, approximately £0.75billion per annum, however last year HMRC disqualified all capital preservation EIS strategies. The other half of the EIS market, which targets capital growth, invests in the “spirit” of EIS; this part of EIS is expanding as the UK start-up environment is buoyant and, investors continue to seek EIS investment. As Mercia’s EIS Funds have always invested in this spirit, i.e. to build long-term value, our team has been in close consultation with the government, HMT and HMRC on these changes. This approach is illustrated by the seeding and provision of long-term support to Blue Prism, a robotic process automation start-up from the North West of England.
Paul Mattick Director of Mercia EIS Fund
These are all ideas that financial advisers are well versed in but are ones which historically have rarely been used in conjunction with EIS. If the right choices are made, then an adviser will be able to combine a tax planning strategy, in combination with diversified early-stage investment strategy, with the potential to provide superior returns uncorrelated to the equity markets.
We play at a different end of the market from start-ups, but where we still believe there is more nurturing to be done
The hard work and tough lessons we have learned along the way as a team of seasoned and successful entrepreneurs puts us in a strong position to find and nurture the best investee companies
THE VALA TEAM
Paddy Willis Co-founder of Plum Baby, a range of premium organic baby foods. Plum Baby became one of the UK’s fastest-growing food start-ups. Paddy went on to co-found Grocery Accelerator, which offers support and investment for ambitious food and beverage start-ups.
This somewhat unique investment team means investors in the group’s EIS portfolio have the added benefit of not just investing in high-growth companies, but are actively placing their faith in the senior management team at Vala itself. “Understanding our track record and experience of conceptualising, incubating, growing and exiting businesses is vital to our success we believe. There are no guarantees that we will get every decision right but by having a substantial track record in the sectors in which we invest, with all the learning that we have accumulated over decades of investing, puts us in the best possible position to make good decisions.”
philosophy at Vala is to invest in portfolio companies and stick by them through thick and thin in order to build relationships with their founders that last a lifetime.” Many of the group’s investments reflect the sectors for which the UK has a vibrant ecosystem, and also where the UK is a world-leader in R&D and growing high value companies. Take Arksen, for example, a company the investment managers have previously invested in. The group operates as part of the UK’s long-established marine engineering infrastructure sector, but itself focuses on developing an innovative range of semi-autonomous explorer vessels with the capacity and technology to take adventurers, scientists and explorers to all corners of the world’s oceans. Another example includes the games development industry, where Smith has invested in companies such as Play.Works, a leader in the development of games accessed through instant messaging platforms or through smart hardware such as TVs.
discipline behind the group’s investment philosophy as a whole. The group’s formation has brought together a unique set of entrepreneurial experiences in founders Jasper Smith and Paddy Willis, both of whom have been investing in companies both singularly and collectively for a number of years. While Smith’s previous ventures include a range of eclectic businesses, from London-based visual media company Static2358 and game show production firm Optimistic Entertainment, Willis was part of the team behind premium organic baby food manufacturer Plum Baby, one of the UK’s fastest growing food start-ups. Together, Smith and Willis have joined forces to create an investment firm that plays to their strengths as entrepreneurial investors, who can actively assist in building a diversified portfolio of high-growth companies that will be able to provide fruitful returns for investors on exit. Indeed, the group’s latest offering, the Vala EIS Portfolio, aims to provide new businesses with not just investment capital that will help support their future growth, but the team also offers a full mentoring and support service to assist them in their journey to success. In doing so, the portfolio aims to return to investors 2X the amount invested net of fees. “We are investors, but like to believe that first of all we are entrepreneurs,” explains Smith. “And we believe the hard work and tough lessons we have learned along the way as a team of seasoned and successful entrepreneurs puts us in a strong position to find and nurture the best investee companies.”
t is often said that the investors behind the EIS sector today are every bit as dynamic and nimble as the high-growth businesses the funds are in place to support. For the founders of Vala Capital, this somewhat apt description goes a step further and embodies the very
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Willis agrees, adding: “Being a serial entrepreneur is a bit like giving birth – you only remember the good things, otherwise you’d never come back to try again. But we want to take the shock and stress out of starting a company, and actively help businesses to succeed.” This entrepreneurial approach to investing is further supported by Vala’s chief operating officer Jane Holland and director James Faulkner. Holland herself has held a number of senior finance roles across the media, food and beverage and FMCG businesses, whilst Faulkner brings 30 years of sales & marketing experience, principally in Financial Services. Smith and Willis are joined in the investment team by Arthur Hughes, a start-up specialist and a successful financier, who previously led the sale of broking business Prebon Yamane to Collins Stewart Tullet in 2004 for £125m.
Jasper Smith
In making the best use of Vala’s business experience, the team’s investment opportunities are more often than not later-stage companies rather than start-ups. This predominantly reflects the fact the team aim to invest in sectors in which they are experienced and have worked extensively. Willis explains: “Given our background, we receive a steady stream of introductions to companies in need of equity finance and as a group we choose the most promising companies to invest in after thorough due diligence. It would be safe to say we play at a different end of the market from start-ups, but where we still believe there is more nurturing to be done.
Investment decisions
”But by having deep experience in the sectors in which they are investing, the investment team invariably has a good understanding of the markets in which the companies are operating, and this is a key point of difference the EIS portfolio offers investors. Smith comments: “In getting to know the leaders in the business we can better understand how robust they are to withstand the challenges of growing a business and whether we can partner with them. This is the essential decision point as to whether we invest or not. “This is really important because often the individuals in a business, the entrepreneur themselves and the management team are the core of the businesses we invest in. Therefore, our
Paddy Willis
Jasper Smith Responsible for overall Vala EIS Portfolio deal flow and mentoring services. Previous ventures include: Static2358, Electra Entertainment, Optimistic Entertainment Plc, PlayJam, PlayStack and Arksen.
James Faulkner James has enjoyed a successful career in sales and marketing for over 30 years primarily within financial services with PwC, ABN Amro and Dun & Bradstreet but with spells in manufacturing and consulting too.
Yet Smith is keen to stress the groups focus on entrepreneurship “isn’t limited to our network, nor to the UK”. Indeed, the EIS portfolio will invest across a range of sectors, pooling its funds into six to ten companies across the technology, engineering, fintech, media and entertainment, lifestyle brands and food and beverage sectors. Vala intends to cast its net far and wide in order to collar the best opportunities for its EIS portfolio. “[Entrepreneurialism] is a global phenomenon happening in every coffee shop, cafe and living room around the world,” he says. “But our starting point is the network of contacts and relationships that we have built up between us over 30 years plus of operating businesses and investing globally.”
Image for illustrative purposes only.
Transparency of fees is an important aspect of investing in high growth companies
Vala Capital’s announcement earlier this year that its newly launched EIS fund will operate a unique fee structure whereby investors do not pay any initial fees, annual management charges or administrative, audit or custodian costs, could help shake-up conversations regarding EIS fees as a whole. Rather than any ongoing charges, the Vala EIS Portfolio will only charge investors a 20% performance fee to be paid on profitable exits. Investee companies will also assist in covering ongoing administration costs through a one-off 6% fee on all cash invested. James Faulkner, director at Vala Capital, says the decision to follow this unique fee structure on the fund echoes the investment strategy of the firm itself, which aims to make investing in entrepreneurial start-ups more transparent and easier. Faulkner explains: “The founders of Vala Capital have all been through the start-up process themselves, and over the years have committed to incubating, investing in, mentoring and supporting high growth companies. It is an area they understand and know very well. As such, they bring deep sector expertise to every investment that is made, and this is what makes the Vala EIS Portfolio stand out. “But in addition to this, we believe transparency of fees is an important aspect of investing in high-growth companies. In order to ensure investors are comfortable with the element of risk they are taking on and the return profile that is expected, they should also be able to clearly understand the fee structure.” Far from trying to encourage an EIS “race to the bottom” on fees, Faulkner believes venture capital firms need to be able to demonstrate how they are running a sustainable business without adding in unnecessary - and often complex - fee charges. “Understanding the fee process of any fund is complex. Whether managers are talking about deferred annual management charges, charges to the companies they invest in, or how much is being held back at the beginning to cover fees overall, it will be different for every fund and in some cases managers cannot even tell investors how much the fees they are going to be paying will be. But if you are able to offer a product with one fee, and no hidden charges, it is a lovely message to send investors.” Faulkner admits there are costs that need to be covered in order to ensure Vala’s investment team is able to look after both its clients and advisers. But equally, by implementing a performance fee, Vala Capital is providing investors with “the truest form of incentivisation” to ensure sure the companies it invests in do well. He explains: “The investment management team at Vala works extensively with our investee companies, and we aim to mentor them to success. Ultimately we are all aiming for a profit share at the end of the investment process and our fee structure alludes to that.”
he EIS sector has seen significant changes over the past few years, including a move away from risk-managed strategies to risk-on strategies as investors seek higher returns. Yet one topic that has been less discussed is the evolution of fees across the sector.
James Faulkner
The Vala EIS Portfolio targets a diversified range of sectors to invest in across the technology, engineering, media and entertainment, and food and beverage sectors to name a few. The portfolio managers are hoping to raise £10m this year which will be invested in a portfolio of six to ten companies. “We call ourselves a generalist fund because we don’t want to tie the hands of the investment team. But we anticipate the investments we make will be in a certain number of sectors that reflect their expertise – the team does after all have a combined track record with venture capital of over 30 exits, with an aggregate three-fold return.” This focused sectorial approach to investing is an important part of maintaining a lower fee structure on the portfolio as well. Whilst other EIS fund managers may make a virtue of screening hundreds of opportunities, Vala Capital expects its deal flow to come from the network of incubators the founders of the business have previously invested in or may have supported and mentored. “The management’s approach is very hands-on: many of those companies we invest in are known to us. We believe this is a key point of differentiation,” explains Faulkner. “We work as mentors with these companies and intend to take board seats in companies wherever possible. Therefore we expect our portfolio to be a blend of follow-on investments familiar to us, and new companies as well.”
Targeted portfolio
Our investment returns over the last five years are among the highest in the sector while controlling volatility at all times
Because of the Business Relief mandate of our IHT portfolios range, we target genuine trading companies for our models. This means that we believe all the companies in our portfolios create genuine value for society in some way, which we feel goes hand-in-hand with creating value for shareholders
“We also have strong links to brokers, networks and other counterparties to ensure that we have a high level of exclusive deal flow across the underlying asset classes. Our investment returns over the last five years are among the highest in the sector while controlling volatility at all times.”
number of companies that have entered the sector over the past few years. Among the shortlisted firms was relative newcomer, Gloucester-based Blackfinch which launched its Adapt IHT Portfolio service in 2014. As with all such services, they are invested in Business Relief (BR) or BR-qualifying trades which means investors can benefit from a 40% inheritance tax saving. For Blackfinch, the arrival of its IHT portfolio services was a natural evolution in the groups offering and points to an established track record of returning cash to investors. Indeed, a recent report from MJ Hudson Allenbridge revealed just how much the group has achieved so far, giving the portfolios an excellent score of 85 and highlighting that whilst the strategy is very sector focused, within each of the sectors the investments made are backed by a different asset that allows for some diversification benefits. The company offers two portfolio options; a capital preservation portfolio that targets 4% growth per annum, and a growth strategy targeting 6% annual growth. Each portfolio aims to access renewable energy schemes, property development projects and asset-backed lending which have different underlying asset allocations depending on the strategy. “We launched the Adapt IHT Portfolios in response to a perceived lack of transparency and investor value in the market place, at that point in time,” explains Richard Cook, Chief Executive of Blackfinch. “We listened to advisers who told us they wanted to have visibility over underlying asset exposure and trading activities and a more equitable share of the investment upside as a result of lower ongoing charges.”
he Investment Week ‘Tax-Efficiency Awards’ held in London last year, went some way to proving just how buoyant the IHT and AIM IHT portfolio services sector remains in the UK: the category garnered one of the highest number of entries and highlighted a
“The due diligence carried out on new investments and projects, and the selection process of these projects, is thorough and well-thought out,” the report said. “The risk management process is robust and appropriate for the strategy.” For Cook, the Adapt IHT Portfolios service’s model not only offers core transparency but also provides several key points of difference in what is a very crowded sector. Cook explains: “This is a true discretionary portfolio service which enables advisers and their clients to understand where their money is being placed and understand the underlying returns throughout the investment period. “The portfolios enable a client to target 4% or 6%, or even to opt out of a sector if they do not wish to invest in that particular area,” he says.
Stefan Apogsowicz, Senior Investment Manager, Blackfinch
Ownership strengths
As it stands, Blackfinch has assets under management and administration of circa £290m but the company is ambitious and hopes to reach a total of £1bn by the end of 2021. One factor in the push towards the billion mark will be the burgeoning wealth managed Blackfinch Wealth Managed Portfolio Service (MPS) which has a more recent provenance and around £30m under management at present. Yet Cook acknowledges the competitive aspect of the IHT services sector and the challenges that lie ahead: “Advisers have a much wider range of choice but also have the challenge of managing their own selection criteria,” he says. “It is important therefore that advisers are able to conduct suitable due diligence on providers. The sector also has downward investment returns pressure on underlying assets, as the market size increases and more providers are seeking to invest into similar deals.” The possibility of an investment squeeze, with too much money chasing too few opportunities, is an obvious one but Cook is confident that Blackfinch has the resources to rise above the melee. As such, the company’s focus is very much on expanding both the quality and quantity of its deal sourcing opportunities. He cites the property developer network in which the group actively operates, which he says has yielded over 50 strong investment opportunities in the last month alone. “This means that we can focus on providing investment upside to the client, whilst selecting the very best deals which also provide high levels of security,” he adds. “While many leading competitors seek to operate on lower pricing, Blackfinch prides itself on providing service and flexibility as a distinguishing factor in its property lending, with investment managers that can add value to their developer clients therefore mainlining a quality margin for its investors.”
We can focus on providing investment upside to the client, whilst selecting the very best deals which also provide high levels of security
Allenbridge makes mention that though rate of assets accrued in the past five years would mean the company would fall short of its £1bn target AUM for 2021, the rate of growth has been accelerating in 2016 and 2017 in particular and that there is the promise of more to come. Helping to achieve it’s goals are Blackfinch’s other key personnel, including Chief Investment Officer Richard Simmonds, and Jerry Price who fulfils the role of Chief Distribution Officer and manages a client services team of 20. Together, Cook, Simmonds and Price took the business on from its previous owners, an Austrian investment group in 2016. The Allenbridge report alluded to the team’s strength in its report, stating the team shows a “good knowledge of the opportunities and challenges” of running a firm of this kind. “Their ownership role, and the fact that they have worked together for a while, are both strengths in terms of thinking of alignment and their likely continued stewardship of the firm into the future,” it added. As such, Cook believes the growth trajectory being followed by the company is “part of the firm’s DNA as a whole.” “We recently launched a Managed Portfolio Service to the market and have seen significant uptake in that market, as well as a Ventures EIS Portfolio service which will invest into early stage companies which offer high growth potential through digital and technology-based solutions,” he says. These two areas will broaden the Blackfinch footprint significantly, meaning the company is now bringing its robust and evolutionary investment philosophy to many more investors than was previously the case. The IHT sector is sure to continue its own secular growth trajectory in the next few years, driven by macro forces which ensure that more advisers and their clients will be looking for solutions to ensure that the lion’s share of the money they pass on isn’t lost unnecessarily to the taxman. Cook is certainly positive. “I see that this theme will continue and that the sector will embrace positive change through increased transparency and investor value, meaning that it has every chance of reaching its full potential as a sector,” he concludes.
A 2020 vision
Richard Cook
Frank is in his seventies, married to Helen, his second wife, for 15 years. Frank has two sons in their forties from his first marriage. Helen has a 25-year-old daughter from her first marriage. Frank and Helen would like their respective children to inherit their individual estates. Frank has a substantial income, whereas Helen only has a small pension. Frank has two main concerns; firstly, he’s worried about Helen’s income if he were to die first. Second, he wants to direct his capital to his two sons after Helen’s death. Frank is considering setting up an Immediate Post Death Interest (IPDI) trust in his will to give Helen an income after his death and direct the capital to his boys on her death. However, he’s concerned that the value of assets held within the IPDI trust will be aggregated with Helen’s estate on her death and will suffer an IHT charge before the net capital is distributed to his sons.
Scenario
Potential solution
Using an immediate Post-Death Interest (IPDI) trust in a will
The IPDI trust could be invested into a Business Relief (BR) qualifying investment on Frank’s death. Assuming Helen lives on for at least two years and the investment is still held at the time of her death, the trust capital would be IHT exempt. Furthermore, this strategy would also enable the full amount of Helen’s own nil rate band to be applied against her own estate, thus protecting it for the benefit of her daughter. Frank could also reduce the strategy’s timeline by investing in BR-qualifying assets during his lifetime and directing the investment to the IPDI trust in his will. If his death occurred within two years of making the investment, Helen would only have to survive for the balance of that two-year period to ensure the capital achieved IHT exemption.
Mitigating Inheritance Tax
Martin is a middle-aged professional and homeowner. He understands that with the value of his home having risen over the years, his combined estate, including his property, savings and investments is now worth £950,000, falling outside the nil-rate band of £325,000 for IHT. He wishes to protect as much of his estate as possible. However, he is not keen on tying money up in expensive traditional structures such as gifts or trusts.
Martin is introduced to the Adapt IHT Portfolios which can bring IHT relief after just two years and if investments are held at death. He selects the Capital Preservation portfolio targeting a return of 4% p.a. He invests £300,000 in the portfolios. He is comfortable that he can make full or partial withdrawals if his situation changes. He also knows that as he is targeting a modest return on his investment, alongside IHT relief, that he can choose to take a regular payment quarterly, semi-annually or annually or leave the capital invested. Martin is now able to plan for his investment in companies qualifying for BR, to bring IHT relief, meaning that this portion of the estate could receive up to 100% IHT relief on his death.
Mitigating an IHT liability created by ISA Investments
Stuart is a working professional with a wife and three children. Now in his sixties, Stuart’s investments and ISA savings are close to £900,000, which sits alongside his pension plan and the family home he owns with his wife, worth in the region of £650,000. He has long been aware that his combined assets of £1.55 million are well above the current Inheritance Tax (IHT) threshold and residence nil rate band (£125,000 for 2018/2019). Stuart wishes to arrive at a financial plan to protect his hard-earned savings and mitigate IHT.
Stuart is introduced to the Adapt IHT AIM Portfolios. The service invests in companies listed on the Alternative Investment Market (AIM) in order to deliver 100% IHT relief, through investments qualifying for Business Relief (BR), after two years (and if still held at time of death). AIM-listed shares can be held in an ISA wrapper, mitigating the IHT liability but continuing to take advantage of ISA tax benefits. A specialist team selects the AIM investments, which Stuart will have access to as and when required. He invests £400,000 into the service, looking to manage a potential IHT liability of £260,000. Through making this investment, Stuart can look to reduce the liability on the amount invested by 40%, with only £250,000 liable for IHT on death, and the amount saved being £160,000.
Martin
Stuart
Frank
The process of using IHT Portfolio services differs depending on an individual’s profile. Here, Blackfinch explores how an IHT investment portfolio is able to help investors mitigate liabilities. Blackfinch’s specialist team are on hand to support IFAs with their clients’ unique circumstances
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